Page 196 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 8: Methods of Redemption–I

this interest is directly transferred to profit and loss account, being treated as interest earned on Notes
general investments. In this case annual appropriation from profits will be more because interest
on investments in not reinvested.
Accounting Treatment: In the case of non-cumulative sinking fund, the following entries are
passed in the books of the company:
1. At the end of first year:
(a) When annual provision is made-
Profit and Loss Appropriation Account Dr.

To Debenture Redemption Fund Account
(b) When amount of sinking fund is invested—
Debenture Redemption Fund Investment Account Dr.
To Bank Account.
2. At end of second year and subsequent years except the last year:
(a) When interest on investment is received—
Bank Account Dr.
To Interest on Debenture Redemption Fund Investment A/c
(b) When interest on investment is transferred to profit and loss account—
Interest on Debenture Redemption Fund Investment Account Dr.
To Profit and Loss Account

(c) When annual provision is made—
Profit and Loss Account Dr.
To Debenture Redemption Fund Account
(d) When amount of annual installment of profit is invested—
Debenture Redemption Fund Investment Account Dr.
To Bank Account

3. At the end of last year:
All the same entries will be passed which were in the case of cumulative sinking fund.
Illustration 9 (Redemption by Non-Sinking Fund)
Good Fortune Ltd. issued 30,000, 8% Debentures of 100 each at a discount of on 1st January,
2003. As per term of issue, the company is required to maintain a non-cumulative sinking fund
but with a provision that the company shall have the power to apply the sinking fund investments
in the purchase of debentures in the open market, if below par at any time. The annual sinking
fund contribution is 72,000. The followings are the relevant facts for the years 2004 & 2005:
A. Interest received by the company on investments:

(i) 2004 2,364
(ii) 2005 3,648
B. Realisation of sinking fund investments:
st
(i) 31 Dec. 2004 33,516 (original cost 33,612)
(ii) 31 Dec., 2005 46,800 (original cost 46,440)
st

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